Onshore bond market comparison
|
|
China |
India |
|
Currency |
CNY (onshore RMB) |
INR |
|
Onshore market size |
$9.23trn 88% traded in the China Interbank Bond Market (CIBM) |
$1.4trn |
|
Composition |
18% Sovereign bonds 24% Policy bank bonds 17% Local government bonds 41% Corporates and others |
65% Sovereign bonds 25% State/State-owned 10% Corporates |
|
Foreign holdings |
1.3% of total 4% of sovereign |
A ceiling of $90bn ($35bn on sovereign and $55bn for the rest), about 80% of quota utilised |
|
Yield |
10-year sovereign: 3.3% |
10-year sovereign: 6.85% |
|
Rating conversion |
AAA domestic rating equals BBB- internationally (investment grade) |
|
Source: People’s Bank of China, UTI, Chinabond
No-default India bonds?
UTI International CEO Praveen Jagwani pointed out that all of India’s sovereign and state-owned bonds have domestic ratings of AAA and have never experienced any defaults.
“The three major rating agencies, Fitch, Moody’s and S&P, have subsidiaries in India. But the rating scale is fixed [for all] and is managed by the regulator,” Jagwani explained.
In China, by comparison, the global credit agencies are only allowed to have minority stake in their Chinese joint-ventures, which follow a domestic rating scale.
India’s bond market has other peculiarities. Issuers with a rating below AA+ are unable to tap into the bond market, and they can only get loans from banks, he noted.
That helps filter out the higher quality companies for the bond market.
“Since the bankruptcy reform [legislation] was passed in 2016, we expect the corporate issuance to double in five years.”
Although the banks have been carrying a fair amount of non-performing loans, Jagwani said there are no rising defaults.
AA-rated issuers (which can only take bank loans) have 10-year average default rates of about 2%, he noted.
To compare, in China, there were 22 defaults by corporates and state-owned enterprises in 2016, up from 7 in 2015.
Offshore bond markets
Some investors in China and India prefer hard currency debt to avoid risks in their wekening currencies. The Indian rupee and the Chinese RMB have weakened by nearly 22% and 11% respectively since 2013. Hedging costs remain high at roughly 3% a year, which wipe off the yield gains.
Chinese regulators have recently relaxed rules for foreign investors to hedge currency exposure using futures traded onshore, which is hoped will bring down the cost of hedging.
The Indian government sets a $90bn limit for foreign capital invested in domestic bonds. That represents about 6% of the overall market.
The quota is not fully used. About 90% of the $35bn quota in sovereign bonds is used and about 70% of the $55bn quota for the rest of the bond types are filled, Jagwani said.
Investors also need to place a bid to purchase the bonds every month if foreign holdings exceed 90% of the quota, he said.
Offshore bond markets
|
|
China |
India |
|
Local currency |
Dim sum bond in CNH $98bn |
Masala bond in INR $5bn |
|
USD denominated |
$250bn |
$38bn |
Source: Standard Chartered, UTI, Axa IM
Quota increases
The Indian government is now planning to increase the quota for sovereign bonds by $2bn every six months, said fixed income portfolio manager Rahul Aggarwal.
“Historically, when there is foreign demand for Indian domestic bonds, the government typically opens the window.”
China has taken a more aggressive approach to attract foreign money. Last year it relaxed access to the CIBM, leading to some global index inclusions for China government bonds earlier this month.
On Tuesday, Premier Li Keqiang said the Bond Connect will be launched this year. It allows retail partcipation for onshore Chinese bonds.
